WaMu Bankruptcy Judge Agrees to Drop Insider-Trading Ruling

U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware,
found in September that there was enough evidence of insider
trading to allow a lawsuit to be filed against four hedge funds
that hold billions of dollars of WaMu’s debt.

Walrath agreed today to certify to a higher court that she
probably will vacate that order, which is on appeal. The
certification would allow Walrath to drop the ruling if she
approves WaMu’s $7 billion reorganization plan at a hearing
scheduled for next month.

Striking part of the insider-trading order will “pave the
way for the debtors to finally exit bankruptcy after three years
of extensive litigation and negotiation with a multitude of
interested parties,” WaMu said in court papers.

WaMu is preparing to try for the third time to win approval
of its plan after settling the objections of critics including
shareholders. The Seattle-based company filed for bankruptcy on
Sept. 26, 2008, the day after its banking unit was taken over by
regulators and sold to JPMorgan (JPM) Chase & Co. for $1.9 billion.

Creditors Rejected

Walrath today rejected the arguments of a group of
creditors that oppose WaMu’s reorganization plan. The group
claimed that Walrath would set a bad precedent by vacating her
ruling and that the four hedge funds were trying to restore
their reputations after being accused of insider trading.

The hedge funds “are pursuing this so they can go out as
part of their business model and say, ‘Look, the judge supported
our position,’” Howard J. Kaplan, a lawyer for creditors, told
Walrath at the hearing.

Shareholders had accused Aurelius Capital Management LP,
Centerbridge Partners LP, Appaloosa Management LP and Owl Creek
Asset Management LP of receiving inside information and using it
to trade on WaMu securities. The four funds denied the
allegations and supported vacating the order.

A committee of shareholders previously dropped their plan
to sue the hedge funds in return for receiving a stake in the
only part of WaMu that will exit bankruptcy under the proposed
reorganization plan.

WaMu’s 4.625 percent bonds that mature in 2014 fell
2.2 percent after the ruling to 110 cents on the dollar,
according to Trace, the bond-price reporting system of the
Financial Industry Regulatory Authority.